Chapter 20

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University of Memphis *

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7080

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Accounting

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Apr 3, 2024

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Chapter 20 Assignments: 1. Which of the following questions is well suited for cost-volume-profit analysis? How many units must be sold to achieve a target level of operating income?; What will happen to profitability if capacity is expanded?; What level of sale must be generated to break even? 2. In cost-volume-profit (CVP) analysis, managers identify ___ that cause increases or decrease in various ___. Activities; cost 3. Costs that do not change significantly in response to changes in an activity base are referred to as ___ costs. Fixed 4. Which of the following are examples of variable costs? Sales commissions; weekly fuel costs for delivery trucks; overtime wages paid to production workers 5. Mixed costs composed of both fixed and variable elements are often referred to as ___ costs. Semivariable 6. Which of the following statements is/are true about cost-volume-profit (CVP) analysis? CVP analysis can be applied to a department within a company; CVP analysis can be applied to a particular product line of a company 7. Rommel Trucking uses cargo miles driven (CMD) as an activity base. The company reports the following breakdown of cost behaviors: Purely fixed costs = $900,000/year; Purely variable costs = $2.50/CMD; and Semivariable (mixed) costs = $100,000/year + $0.50/CMD. Compute the company's estimated total cost per CMD if the following miles are logged by drivers during the year: 1. The estimated total cost per CMD at 400,000 miles logged is $___. 2. The estimated total cost per CMD at 800,000 miles logged is $___. 3. The estimated total cost per CMD at 1 million miles logged is $___. $5.50; $4.25; $4 8. Which of the following is the most appropriate activity base for a retail company to use for cost-volume-profit analysis? Sales revenue generated 9. True or false: Changes in the average total cost per unit of an activity base result solely from changes in the average fixed costs associated with an activity base. TRUE 10. Which of the following is an example of a fixed cost? Annual property tax 11. As activity base volume increases, total variable costs: increase 12. Which of the following is an example of a variable cost? annual cost of goods sold

13. The economies of scale achieved by increasing production output cause which of the following to decrease? average total cost per unit; average fixed cost per unit 14. Semivariable costs are sometimes called mixed costs because they contain both a ___ and a ___ component. Fixed; variable 15. Donaldson Trucking uses cargo miles driven (CMD) as an activity base. The company reports the following breakdown of cost behaviors: Fixed Costs per Year License fees = $12,000 Insurance = $28,000 Depreciation = $160,000 Office & Clerical = $190,000 Variable Costs per CMD Driver wages = $0.40/CMD Fuel = $1.25/CMD Semivariable Costs/CMD Maintenance & Service Costs = $10,000 + $0.35/CMD The intercept of the company's total cost graph is $___. $400,000 The slope of the company's total cost line is $___. $2 The company's estimated total cost at 1 million CMD is $___. $2,400,000 16. Changes in the average total cost per unit of an activity base result solely from changes in the average ___ cost per unit associated with an activity base. Fixed 17. As activity base volume increases, variable costs per unit of activity: stay the same 18. The unit cost savings that result from increasing output by using production facilities more intensively are referred to as ___ ___ ___. Economies of scale 19. Which of the following might cause total variable cost behavior to appear as a curvilinear function? Receiving price discounts on larger and larger purchases of direct materials as output volume increases to higher and higher levels; Paying overtime wages to direct labor workers as output volume increases to higher and higher levels

20. Which of the following would most likely exhibit semivariable behaviors? selling, general, and administrative costs; factory overhead costs 21. True or false: Businesses tend to operate somewhere between 45% and 80% of full capacity to avoid large fluctuations in volume that can cause irregular cost behavior patterns. TRUE 22. What happens as input units of a particular activity base increase? The average total cost per unit of that activity base decreases; The average fixed cost per unit of that activity base decreases 23. True or false: Changes in the average total cost per unit of an activity base result solely from changes in the average fixed costs associated with an activity base. TRUE 24. Complete the following formula: Revenue – Variable Costs – Fixed Costs = ___ ___. Operating income 25. As activity base volume increases, the average fixed cost per unit of activity: decrease 26. The fixed cost line of a cost-volume-profit graph: has a slope of 0; is horizontal throughout a company's relevant range of activity 27. Which of the following might cause fixed cost behavior to appear as a stair-step function? Adding additional supervisors as output volume increases to higher and higher levels; Renting additional storage warehouse space as output volume increases to higher and higher levels 28. Prior to reaching the break-even point, each dollar of contribution margin contributes to the coverage of a company's ___ costs. Fixed 29. For most companies, it is reasonable to assume that total costs tend to vary with volume in a straight-line pattern within a ___ ___ of output. Relevant range 30. If a company has a contribution margin ratio of 75%, which of the following statements is/are true? Up to the break-even point, each dollar of sales will contribute 75 cents to the coverage of fixed costs; After the break-even point, each dollar of sales will contribute 75 cents to operating income

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31. Medford sells muffler bearings. Medford's sales price per unit is $150, and its variable cost per unit is $50. The company's fixed costs total $800,000. The company's break-even point is ___ units . 8,000 32. The level of activity at which a company's ___ income equals ___ is referred to as its break-even point. Operating zero 33. The cost-volume-profit graph reveals that for every additional unit of product that a company sells: total costs will increase by the slope of the total cost line; the distance from the fixed cost line to the total cost line will increase by the variable cost per unit; total costs will increase by the variable cost per unit 34. Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed costs currently total $900,000. Wilson expects to generate revenue of $4 million in the upcoming period. The company must reduce its current level of fixed costs (FC) by $___ in order to achieve a target operating income of $850,000. $150,000 35. After the break-even point has been reached, each dollar of contribution margin contributes directly to a company's___ ___. Operating income 36. A company's margin of safety multiplied by its contribution margin ratio equals its ___ ___. Operating income 37. A company has a contribution margin ratio of 40%. After the break-even point, each dollar of sales will contribute___ cents to the company’s ___ income. 40; operating 38. Medford sells muffler bearings. Medford's sales price per unit is $150, and its variable cost per unit is $50. The company's fixed costs total $800,000. The company must sell ___ units to achieve a target operating income of $1.5 million. 23,000 ( $150 - $50 = $100 then ($800,000 + $1,500,000)/ $100 = 23,000) 39. The term profit in cost-volume-profit analysis refers to operating income because: taxes and nonoperating gains and losses do not possess the characteristics of variable or fixed costs 40. A company's expected dollar change in ___ volume multiplied by its ___ ___ ___ equals its estimated change in operating income. Sales; contribution margin ratio 41. Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed

costs total $900,000. The amount of sales required to earn a target operating income of $600,000 is $___. $3,750,000 42. Dingo manufactures boosters. Dingo's selling price per booster is $50, and its variable cost per booster is $15. The company's fixed costs total $350,000, and its current sales level is $700,000. 1. The company's break-even point in sales dollars is $___. 2. The company's margin of safety is $___. 3. The company's current operating income is $___. $500,000; $200,000; $140,000 43. A company's marketing manager is considering a plan to increase her annual advertising budget by $75,000. By doing so, she estimates that the company's annual revenue would increase by $300,000 over its current level. The company's contribution margin ratio is 30%. If the marketing manager's plan is implemented, the company's operating income is expected to increase by $___. $15,000 44. If a company has a contribution margin ratio of 75%, which of the following statements is/are true? After the break-even point, each dollar of sales will contribute 75 cents to operating income; Up to the break-even point, each dollar of sales will contribute 75 cents to the coverage of fixed costs 45. A company sells 3 products: A, B, and C. Its annual fixed costs average $70,000, and its target operation income is $580,000. Each product's contribution margin ratio (CM%) and relative sales mix are shown below: Product A's CM% = 10% (50% of the sales mix); Product B's CM% = 15% (40% of the sales mix); Product C's CM% = 20% (10% of the sales mix). 1. The company's average contribution margin ratio is ___%. 2. The amount of sales required to achieve the target operating income is $___. 35%; $5,000,000 46. Assume the following: FC = Fixed Costs; CM = Contribution Margin per Unit; TOI = Target Operating Income Units = Sales Volume in Units. Which of the following is the formula for determining the sales volume required in units to earn the desired level of operating income? Units = (FC + TOI)/CM 47. Companies continually strive to improve profitability by increasing: quality sales; sales of those products with the highest unit contribution margins; sales of those products with the highest contribution margin ratios

48. A company's current sales volume is $960,000, and its contribution margin ratio is 45%. The company anticipates that its current sales volume will increase by 20% in the upcoming period. If its sales projections are correct, the company's operating income will increase by $___. $86,400 ($960,000 x 20%)x 25%) 49. To find the unit variable cost element of a company's total semivariable costs, the high-low method is used to determine: the slope of the total semivariable cost line; the change in total semivariable costs that results from changes in a relevant activity base 50. Wilson sells industrial benders. Wilson's sales price per bender is $500, and its variable cost per bender is $300. The company's fixed costs total $900,000. The company's break-even point in sales dollars is $___. $2,250,000 51. Demand for a company's product is expected to increase significantly in the upcoming year, resulting in additional direct labor overtime costs of $2 per unit. The production manager expects that the higher volume will increase annual maintenance costs on the company's manufacturing equipment by $20,000. Fixed costs currently average $500,000 per year, and the company's contribution margin per unit is currently $27. Based on this information, the production manager estimates that the company must produce and sell ___ units to achieve a target operating income of $250,000 in the upcoming year. 30,800 52. Wilkinson Corporation uses the high-low method to estimate the fixed and variable cost elements of its total manufacturing overhead. The company uses direct labor hours (DLH) as its activity base. In the current year, its highest month of activity was 3,200 DLH, with a corresponding total manufacturing overhead cost of $300,000. Its lowest month of activity was 1,700 DLH, with a corresponding total manufacturing overhead cost of $180,000. The company anticipates that it will use 2,500 DLH in January of the upcoming year. Use the high-low method to determine the following: 1. The variable manufacturing overhead cost per DLH is $___. 2. The monthly fixed manufacturing overhead cost is $___. 3. The estimated total manufacturing overhead cost in January of the upcoming year is $___. $80; $44,000; $244,000

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53. The term ___ ___ often is used to describe the relative percentages of total sales provided by a company's different products. Sales mix 54. Almost every business encourages its sales team to improve ___ sales by aggressively marketing those products with the highest ___ ___ ratios. Quality; contribution margin 55. True or false: In practice, the underlying assumptions of cost- volume-profit analysis may sometimes be difficult to satisfy. TRUE 56. The ___-___ method is an easy way to determine the fixed and variable elements of semivariable costs. High-low 57. Assume the following: FC = Fixed Costs; Sales = Sales Volume in Dollars; CM% = Contribution Margin Ratio; TOI = Target Operating Income. Which of the following is the formula to determine the sales volume required in dollars to earn the desired level of operating income? Sales = (FC + TOI)/CM% 58. The high-low method enables managers to determine a___ ___ used to project total semivariable costs at various levels of activity. Cost formula 59. A company sells 3 products: A, B, and C. Its annual fixed costs average $560,000, and its target operating income is $200,000. Each product's contribution margin ratio (CM%) and relative sales mix are shown below: Product A's CM% = 20% (15% of the sales mix); Product B's CM% = 50% (10% of the sales mix); Product C's CM% = 40% (75% of the sales mix). 1. The company's average contribution margin ratio is ___%. 2. The amount of sales required to achieve the target operating income is $___. 38%; $2,000,000 60. Which of the following is not an underlying assumption of cost- volume-profit analysis? Total variable costs as a percentage of sales change as sales activity varies 61. When a company sells multiple products, the ___ ontribution margin ratio is used in the denominator of its break-even formula. Average 62. True or false: Cost-volume-profit analysis is not a useful planning tool if any or all of its underlying assumptions are violated. FALSE Homeworks:

1. True or False: When cost-volume-profit analysis is used, the need for a cost accounting system is eliminated. FALSE 2. The break-even point in a cost-volume-profit graph is always found at: The volume at which total revenue equals total fixed costs plus total variable costs. 3. True/False: With fixed costs, the average cost per unit varies with changes in volume. TRUE 4. If the unit sales price is $14, variable costs are $7 per unit and fixed costs are $42,000, how many units must be sold to earn an income of $250,000? $41,715 (42,000 + 250,000)/(14-7)= 41,715) 5. True or False: As volume increases, variable costs per unit decrease but stay the same in total. FALSE 6. True or False: As volume increases, per unit fixed costs stay the same. FALSE 7. Consider a company with an operating income of $72,000 and a contribution margin ratio of 56%. What is its margin of safety? $128,571 ($72,000 ÷ 0.56 = $128,571) 8.

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